Tax Deductions in Startup Expenses for Rental Properties

This write-up discusses deductible startup expenses for rental properties. You may be permitted to deduct a number of expenses incurred as you prepare your rental property, but before actually letting the rental property.

Note: Startup expenses discussed here, are dissimilar from the expenses allowable as a deduction (in section 195 of the Internal Revenue Code.) Within that section 195, certain expenses incurred as startup expenditures of an active trade or active business are deductible up front up to $5,000, with the balance amortizable over a fifteen-year period. However, in this section 195 of the Internal Revenue Code, rental activity isn’t included because rental activity is thought to be a passive activity not as an active business or trade. Find more information on active versus passive rules in the article titled Tax Deductible Rental Losses.

NOTE: “Rental activity” starts right when you place a property on the market, not when you have actually rented it.

Expenses to Obtain Mortgage

Expenses such as recording fees, mortgage commissions, and abstract fees, are capitalized and develop into part of your basis in the property. This means that you’ll have to depreciate these particular expenses, instead of expensing them all at once. See the article entitled Depreciation Expenses for Rental Property, included in this Landlord Tax Guide, for a more in depth discussion on depreciation.

Points

What are points? They are charges paid by a borrower to take out a mortgage or a loan. This points or charges may also be called origination fees, or premium charges, or maximum loan charges. Points are essentially prepaid interest. Thus, they are deductible as interest, but you cannot deduct the full amount at once. Rather, you must amortize the points over the life of the loan. Figuring out the quantity of points to amortize per year is no simple venture. Talk to a tax professional.

Repairs vs. Improvements

You need to capitalize and depreciate all improvements to the property previous to putting the property on the market. Improvements are those that prolong the use of the property or materially increase the property’s market value. Repair expenses, on the other hand, you may freely deduct. A repair maintains your property in good working condition without adding to its value or prolonging its use. Within the Landlord’s Tax Guide there is more on deductions and depreciation, you would like to read further.

Tax CPA+John Huddleston has written numerous articles on accounting and other tax issues effecting small businesses. He holds a Masters in Tax Law from the University of Washington.

About Portland CPAPortland CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has owned Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

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